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Business Succession Planning

July 20, 2015

When developing a succession plan for yourbusiness, you must make many decisions. Shouldyou sell your business or give it away? Should youstructure your plan to go into effect during yourlifetime or at your death? Should you transfer yourownership interest to family members, co-owners,employees, or an outside party? The key is to pick thebest plan for your circumstances and objectives, andto seek help from financial and legal advisors to carryout this plan.

Selling your businessSelling your business outright

You can sell your business outright, choosing theright time to sell--now, at your retirement, at yourdeath, or anytime in between. The sale proceeds canbe used to maintain your lifestyle, or to pay estatetaxes and other final expenses. As long as the price isat least equal to the full fair market value of thebusiness, the sale will not be subject to gift taxes. But,if the sale occurs before your death, it may result incapital gains tax.

Transferring your business with a buy-sellagreement

A buy-sell is a legally binding contract that establisheswhen, to whom, and at what price you can sell yourinterest in a business. A typical buy-sell allows thebusiness itself or any co-owners the opportunity topurchase your interest in the business at apredetermined price. This can help avoid futureadverse consequences, such as disruption ofoperations, entity dissolution, or business liquidationthat might result in the event of your suddenincapacity or death. A buy-sell can also minimize thepossibility that the business will fall into the hands ofoutsiders.

The ability to fix the purchase price as the taxablevalue of your business interest makes a buy-sellagreement especially useful in estate planning.Agreeing to a purchase price can minimize thepossibility of unfair treatment to your heirs. And, if

your death is the triggering event, the IRS'acceptance of this price as the taxable value can helpminimize estate taxes.

Additionally, because funding for a buy-sell is typicallyarranged when the buy-sell is executed, you're able toensure that funds will be available when needed,providing your estate with liquidity that may beneeded for expenses and taxes.

Private annuityWith a private annuity, you transfer your ownershipinterest in the business to family members or anotherparty (the buyer). The buyer in turn makes a promiseto make periodic payments to you for the rest of yourlife (a single life annuity) or for your life and the life ofa second person (a joint and survivor annuity). Again,because a private annuity is a sale and not a gift, itallows you to remove assets from your estate withoutincurring gift or estate taxes.

Until 2006, exchanging property for an unsecuredprivate annuity allowed you to spread out any gainrealized, deferring capital gains tax. IRS regulationsproposed that year have effectively eliminated thisbenefit for most exchanges, however. If you'reconsidering a private annuity, be sure to talk to a taxprofessional.

Self-canceling installment noteA self-canceling installment note (SCIN) allows you totransfer your interest in the business to a buyer inexchange for a promissory note. The buyer mustmake a series of payments to you under that note,and a provision in the note states that at your death,the remaining payments will be canceled. Like privateannuities, SCINs provide for a lifetime income streamand they avoid gift and estate taxes. But unlikeprivate annuities, SCINs give you a security interest inthe transferred business.

The key is to pick thebest plan for yourcircumstances andobjectives, and to seekhelp from financial andlegal advisors to carryout this plan.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

IMPORTANT DISCLOSURES

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (MemberFINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS are not NCUA/NCUSIF or otherwise federally insured, arenot guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. InvestmentRepresentatives are registered through CFS. Coastal Federal Credit Union has contracted with CFS to make non-deposit investments productsand services available to credit union members.

Trust Services are available through MEMBERS Trust Company. CFS* is not affiliated with Members Trust Company.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

Gifting your businessIf you're like many business owners, you'd prefer tohave your children inherit the result of all your yearsof hard work and success. Of course, you canbequeath your business in your will, but transferringyour business during your lifetime has manyadditional personal and tax benefits. By gifting thebusiness over time, you can hand over the reinsgradually as your offspring become better able tocontrol and manage the business on their own, andyou can minimize gift and estate taxes.

Gifting your business interests can minimize gift andestate taxes because:

• It transfers the value of any future appreciation inthe business out of your estate to your heirs. Thiscan be especially valuable if business growth isexpected.

• Gifts of $14,000 (in 2014 and 2015) per recipientare tax free under the annual gift tax exclusion.

• Aggregate gifts up to $5,430,000 (in 2015,$5,340,000 in 2014) are tax free under yourlifetime exemption.

• Partial interest gifts, as with GRATs, GRUTs, andFLPs, may be valued at a discount for lack ofmarketability or restrictions on transferability.

Gifting your business using trustsYou can make gifts outright or use a trust. You caneven structure a trust so that you keep control of thebusiness for as long as you want. You can establish arevocable trust, which will bypass probate and allowyou to change your mind and end the trust, or anirrevocable trust, such as a grantor retained annuitytrust (GRAT) or a grantor retained unitrust (GRUT)that can provide you with income for a specifiedperiod of time and move your business out of yourestate at a discount.

Gifting your business using a familylimited partnershipYou can transfer your business interest using anotherentity, such as a family limited partnership (FLP). AnFLP is a limited partnership formed to manage andcontrol a family business. You (and your spouse) canbe the general partners, retaining control of thebusiness itself and receiving income from thebusiness, while your children can be limited partners.By transferring the business to an FLP, you may beable to use valuation discounts and substantiallyreduce the value of the business for tax purposes bymaking annual gifts to the limited partners.

Common businesssuccession planningobjectives

• Ensure smooth,seamless transfer ofownership

• Transfer business tonext generation

• Ensure businesscontinuity

• Retire with incomesource

• Minimize gift and estatetaxes

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